Doing Business in China: A Japanese Retailer Puts Down Local Roots

 “If you want to develop a retail business in China, you need to have resolve—the resolve to live there for the twenty to thirty years it will take to win the support of local people. Without that, you can’t put down roots in the local ground.”

So declares 64-year-old Saegusa Tomihiro, chief executive officer of China operations at Ito-Yokado. In April 1996 this major Japanese chain store operator became the first foreign retailer to win authorization from the Chinese government to set up outlets throughout China. Since then it has steadily expanded its retail network, focusing on Chengdu (capital of Sichuan Province) and Beijing, and it now operates eight stores in Beijing and six in Chengdu.  Saegusa has been involved in Ito-Yokado’s China operations for 18 years, ever since he took part in the project of setting up the first store.

The first Ito-Yokado store in China was opened in the Chunxilu shopping district of Chengdu in November 1997. The siting of the first store in Chengdu was in response to the enthusiastic encouragement of the city’s mayor at the time. This was followed about six months later by the opening of a store in Shilipu, Beijing in April 1998. Saegusa was originally sent to China to work in Beijing, but he was quickly transferred to Chengdu to work on the opening of the store there. Since then Ito-Yokado has put down roots locally, achieving great results particularly in Chengdu, where in 2012 its five stores recorded total sales of ¥53.5 billion.

An Award from the Chinese Government

As Saegusa explains, the stance of retail and other service businesses is different from that of manufacturers, which are affected by production costs: “Once we decide [to operate in a particular location], we dig in for the long haul, unswayed by movements in variable factors like personnel expenses, our stock price, and rents.” Of course, the first few years involved an ongoing process of trial and error, and over the past 18 years Ito-Yokado has experienced a variety of challenges, including natural disasters and anti-Japanese demonstrations.

The SARS (severe acute respiratory syndrome) scare that struck China in 2003 was especially serious in Beijing. But Ito-Yokado weathered this crisis with rigorous sanitary measures and prompt responses. And in May 2008 a magnitude-7.9 earthquake struck Sichuan, shaking Chengdu. At the time Saegusa was the chief executive for Ito-Yokado’s three stores in the provincial capital.

“This region had little experience with earthquakes, and there wasn’t a proper crisis management system in place. I drew on our Japanese experience.  First we made sure that our customers got out safely. Then I told the employees that we’d open the following day and ordered them to check for damage.” Having determined that the structures were safe, Saegusa issued the decision to open all three stores the following day. He had employees from the merchandise department make the rounds by truck to procure supplies of water, rice, instant ramen, and other goods. He felt it was Ito-Yokado’s social responsibility to supply goods in the wake of the disaster.

“By doing our best at times of disasters like earthquakes, Japanese-affiliated Ito-Yokado was able to establish its local reputation as a firm that can be relied on. Several days after we reopened our stores on the day after the quake, senior municipal and party officials in Chengdu visited us and expressed their thanks for our quick response.” With almost all the other retail outlets in the city unable to open, Ito-Yokado was mobbed by customers, but the employees pulled together as a team and were able to handle the crowds.

In December of that year, marking the thirtieth anniversary of the adoption of the reform and open-door policy, the Chinese government gave citations of merit to 30 individuals in the distribution sector. Saegusa was the only non-Chinese in this select group. He explains: “The reasons [for my selection] were clear: that we had continued to operate in the same region for more than a decade, that we were paying taxes faithfully, and that we were contributing to the community. These are all items that could be seen as only natural, but they were not easy to accomplish in China at the time.”

Political and Economic Affairs Are Inseparable

Every spring Saegusa holds a cherry-blossom-viewing party with members of the local staff in Chengdu. (Photo courtesy of Seven and i Holdings)

Even if a company like Ito-Yokado roots its business locally in China and wins the trust of Chinese consumers, its stores become prime targets when anti-Japanese demonstrations break out. “I’ve experienced a number of anti-Japanese campaigns, and I’ve learned something important from them,” says Saegusa. “China is a country where political and economic affairs are inseparable. It’s impossible to have warmth just in the economic relationship. If the central government waves the [anti-Japanese] flag, local governments have no choice but to follow. So they tell us to endure [being the target of attacks].”

In fact, the possible effects of anti-Japanese movements are something that the company must always have in mind. Saegusa explains, “It’s normal for us to experience headwinds and rain” depending on the posture of the central government at the time. “If you can’t put up with that kind of adversity, you can’t continue doing business in China. What’s most important is to hold the risks to a minimum and keep the employees from getting rattled.”

When a wave of anti-Japanese demonstrations broke out in 2012 following the Japanese government’s nationalization of the Senkaku Islands, Saegusa visited each of the stores and assembled their managers and staff to deliver this forceful message: “Ito-Yokado is a Japanese investment. But we don’t send the profits we make here back to Japan. We procure our merchandise locally. Our stores are here to make their local communities better off. The money that our employees earn makes both them and their communities more affluent. We also create more jobs. If we get distracted by political issues, we won’t be able to open the way to the future. Let’s work together and do the best we can as a private-sector enterprise.”

The stores were protected as a joint effort, with the Japanese in leadership positions composing their minds and responding to the situation and the Chinese employees sharing their sentiments. When anti-Japanese emotions were running high, there were many cases of Chinese sales clerks being verbally abused by customers, but the troubles did not lead to increased turnover among employees.

Emphasis on Developing Personnel

Opening ceremony at a Chengdu Ito-Yokado sports festival: More than 20,000 people take part in this major event. (Photo courtesy of Seven and i Holdings)

The Ito-Yokado operations in Beijing and Chengdu currently provide jobs for over 25,000 Chinese, including regular employees and people working for store tenants. At the outset the company devoted great efforts to the training of employees, including inculcation of Japanese-style bowing and other etiquette for serving customers. It took time to fully implant the practice of providing attentive service to customers, but the company worked steadily at developing its human resources. In order to build a sense of solidarity among employees, Chengdu Ito-Yokado has been holding sports festivals for its own workers and the sales staff of tenants since 2011. “We are creating various occasions as part of our employee development effort,” Saegusa explains.

Affiliates of Western companies dangling offers of high pay have poached Chinese employees trained at Ito-Yokado for use as high-quality, ready-to-work personnel in their own operations. But in recent years, Saegusa reports, turnover has been low. “Western affiliates may hire people by offering them high salaries, but if their performance is poor, they are quickly discarded. Now [our Chinese employees] have stopped responded to headhunting offers, because they figure even if the salary offer is high, it’s not worth it if they get fired after a year or so.”

Recently the Chinese government has designated September 3 as a day for commemorating victory in the war of resistance against Japan (the Sino-Japanese War of 1937–45) and December 13 as a national day of mourning for the Nanjing massacre. These memorial days may be occasions for major anti-Japanese campaigns and could lead to boycotts or other adversities for Japanese companies in China. But Saegusa is confident that Ito-Yokado’s Japanese and Chinese employees together can overcome such challenges.

“China Plus One” Hype in the Japanese Media

Ever since the anti-Japanese demonstrations over the issue of the Senkakus, “China plus one” thinking has been spreading among Japanese manufacturers with plants in China. The idea is to avoid concentrating investment too heavily in China, where anti-Japanese protests and rising wages have become prominent factors, and to set up parallel operating bases elsewhere, mainly in Southeast Asia, as a risk-diversification strategy. But Saegusa feels that the Japanese media have been tending to stress the negative side in their coverage of China, focusing on the country’s risks and on the slowing of its growth, with stories proclaiming that “China is dangerous” and suggesting that pairing up with China will cause irreparable harm.

“Risk is everywhere in the world, not just in China,” Saegusa observes. “But it certainly is an extremely complicated environment, given the pairing of a political system of Communist Party rule with a capitalist economic system.” So if a company in the distribution sector wants to enter the Chinese market, “one would have to say it’s too sanguine to think of developing nationwide operations from the start,” he declares. “Start by inserting a wedge in a single region and win support there. Then extend operations to other regions. It’s important to consider what sort of relationships to build with local stakeholders in each region. Unless you do that, it’s hard to succeed in China.”

Saegusa cites Suntory’s Chinese beer business as an example of another company’s success story. “Suntory focused on Shanghai as a target and moved on to other regions after it won a 50 percent share there.”

Supplying Fresh Surprises to China’s Fast-Maturing Consumers

Even if a business has put down local roots, however, it cannot be complacent. According to Saegusa, China’s consumer market is maturing at a breakneck pace. “China’s gross domestic product has tripled since we started operating here in 1996. In 2013 the figure came to about 1 quadrillion yen, or twice the size of Japan’s GDP. And it’s seen growing to 1.5 quadrillion yen by 2020. Monthly income was 2,000 to 3,000 yuan per household in 2008, but in 2013 some 60 percent of households in Chengdu were earning more than 10,000 yuan a month. In both Beijing and Chengdu, ordinary citizens’ living standards are improving year by year.”

In urban areas, increasing numbers of people are using their money not so much on physical goods as on concerts, trips, and other activities that they enjoy. The rapid rise of this tendency to seek affluence in the mental rather than physical sphere has meant the end of the age when anything would sell as long as it was cheap, and it has also slowed sales of products that are excessively high in quality and price. This change has affected Ito-Yokado’s stores. In recent years retailers have opened one big store after another with commercial floor spaces of fifty to a hundred thousand square meters, but Saegusa says that they have been finding it hard to meet their originally planned sales targets. He explains, “This is because all the stores are similar, and just filling the shelves with cheap products doesn’t appeal to shoppers.”

Ito-Yokado has also been struggling to cope with this rapid change, and at the end of March 2014 it closed its Wangjing store in Beijing, which was opened in 2006. Meanwhile, the store that it opened in Chengdu’s Wenjiang district in January has proved very popular. Saegusa explains, “We designed the store with a focus not so much on creating a place to sell goods as on letting customers enjoy themselves and sense new things.” This involved, for example, setting up children’s play areas and customer lounges.

In urban areas, meanwhile, convenience stores have been growing in number. As of the end of April, Seven-Eleven Japan, which along with Ito-Yokado belongs to Seven and i Holdings, had 158 stores in Beijing, 81 in Chengdu, 74 in Shanghai, 52 in Tianjin, 25 in Qingdao, and 4 in Chongqing.

Ito-Yokado stages events on special occasions, such as the “American Fair” held to mark US First Lady Michelle Obama’s visit to China in March 2014. (Photo courtesy of Seven and i Holdings)

In order to offer customers new and enjoyable experiences, it is necessary to plan various events flexibly in response to what is happening. For example, when US First Lady Michelle Obama and her two daughters visited China in March 2014, Ito-Yokado scrambled to stage an “American Fair” featuring US-related products at its stores in Beijing and Chengdu, and the event was popular. Saegusa notes the importance of a sense of speed in event planning, which requires sensitivity to current topics and popular trends.

“You’ll fail if you look [at China] through glasses tinted with preconceptions of what the Chinese are like,” warns Saegusa. “It’s crucial to develop local business based on a global perspective.”

The quest continues at Ito-Yokado in China to be locally rooted while constantly pursuing change.

(Based on an April 21, 2014, interview in Japanese. Interview and text by Tsuchiya Hideo, journalist and member of the Nippon.com editorial board. Interview photographs by Kodera Kei.)